Professional Liability Insurance for a Sole Proprietorship (2024)

FAQs

What kind of insurance do I need for a sole proprietorship? ›

If you're the sole proprietor, it means you're personally liable for your business. That means you're responsible for all claims, debts and duties. With a sole proprietorship, there's no separation between business and personal assets. That's why it's important to have professional liability insurance.

An important downside of a sole proprietorship is that it provides no liability protection to the owner. By contrast, an LLC separates business and personal assets and the owner is protected against creditors seizing their assets, such as their home.

Only general liability insurance can spare your business from lawsuits over a visitor slipping and falling on your commercial property. And only professional liability insurance can shield you from the high cost of alleged professional mistakes that cause a third party financial losses.

You are personally liable for any debts or obligations of your business, so if the business can't cover its debts, creditors or lawsuit claimants can seize personal property and funds from your personal accounts. Raising money. You may struggle to raise money because, with a sole proprietorship, you can't sell stock.

When you're starting your own business, some types of coverage you should make sure to have are: General liability insurance. Professional liability insurance. Workers' compensation insurance.

A sole proprietorship is a business that's owned and operated by one person, while a limited liability company (LLC) can be formed by an individual or a group of entrepreneurs. Each has their own unique benefits as an effective business structure.

Purchase business insurance. This is perhaps the most important step of all and may save your personal assets from being seized if you are a sole proprietor and someone sues you or your company. Ask your insurance representative to recommend the type of coverage your business needs to protect your assets.

IRS regulations do not require a sole proprietor to have an EIN. Instead, they allow the business owner to use their Social Security number as their taxpayer identification number. However, according to the IRS, an EIN is necessary when: You file excise tax returns.

Unlimited liability

Among one of the biggest disadvantages of a sole proprietorship is unlimited liability. This liability not only spans the business but the business owner's personal assets. Debt collectors can access your savings, property, cars, and more to see a debt repaid.

Just because you've purchased professional liability insurance, doesn't mean you get to deduct it on your taxes. In fact, you may only write off your insurance premiums for this type of coverage if you are a service professional who is required by law to maintain a liability policy.

What is individual professional liability insurance? ›

Individual professional liability insurance helps provide legal representation, claim investigation, and other costs associated with defending a malpractice case on your own. The liability insurance you receive from an employer may typically only cover allegations of malpractice.

Medical malpractice is only for medical incidents. Professional liability covers medical malpractice as well as the business premises.

The business owner has unlimited liability (i.e. the business owner is personally liable for all the debts and losses of the sole proprietorship) It can sue or be sued in the owner's name.

Self-employed individuals generally must pay self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

Unlimited personal liability

This is the greatest risk of a sole proprietorship. Without having a separate entity for your tax and legal issues, a court is likely to see all of your assets and liabilities, including personal, non-business-related items, as a single group.

But sole proprietors report business income on their individual income tax returns. They report this to the Internal Revenue Service (IRS) using IRS Form 1040. They attach Schedule C, which outlines business profits and losses. Sole proprietors also pay self-employment taxes (FICA).

Self-employed people who qualify are allowed to deduct 100% of their health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, their dependents, and any nondependent children aged 26 or younger at the end of the year.